More banks exposed to rising rates

The FDIC just published the most recent edition of their Supervisory Insights (Winter 2009). There are some interesting topics covered this quarter and, given my firm’s focus on measuring interest rate risk for community banks, one article in particular caught my eye:

The best quote from the article comes in just the third paragraph, “Recent FDIC Call Report data suggest financial institutions are becoming…more exposed to increases in interest rates.” I certainly agree with this observation. Data sited in the article supports the case: higher concentrations of longer-term assets and more use of less-stable funding sources. However while they mention that simulation is the best way to measure interest rate risk exposure, they don’t run a simulation themselves and therefore can’t present any simulation results - fortunately Olson Research can.

Our summary short-term interest rate risk measurement shows that indeed more banks are exposed rising rates. While the level of net interest earnings at risk exposure remains about the same, between 6.5% and 8.5%, the number of banks exposed to rising rising rates has increased (see graph at the right). When the target Fed Funds rate reached its lowest point in the 4th quarter of 2008 the number of banks exposed to rising rates was 64%. After three more quarters of historically low rates the number of banks exposed to rising rates is 71%.